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Record Highs Or Santa Crash? Wall Street Looks Ahead After Historic Rally
It's rational to ask if asset prices are destined to buckle under the weight of last month's rally -- to wonder if the path to "El Dorado" was paved with fool's gold.
After all, the S&P's now a mere 4% from its record highs, a remarkable feat given all that's happened, recession odds are elevated (according to most) and the 2024 geopolitical agenda is "busy" (as Goldman recently put it).
Traders (including Bill Ackman and Bill Gross) are betting on Fed cuts. And Fed cuts there will almost
As recently as 2022, the Federal funds rate was around zero.
In some ways, from a long term perspective, the inflation experienced during the past 36 months was a “gift” to the Fed- which allowed them to reload their “guns” (raising rates) as ammunition to drop rates in the future against further, long term, deflationary pressures.
When FFR was around zero, Powell had to be having a lot of sleepless nights wondering what he could do next without causing global financial stress to effectively stimulate the economy. Contrast that with now (FFR at 5.22%) when he can sleep well, knowing that when inevitably deflation does return, he can deal with that- at least for a while.
IMHO, he won’t be too quick to start dropping again, because each interest rate drop means less “bullets” for the future.
Agreed, and this is why I don’t think the market would tank even if we went into a moderate recession. Markets will just front-run rate cuts and the everything rally will march on. That’s why I expect new market highs despite possible recession.
Where I think things might get interesting is if white collar unemployment is unexpectedly high and government is divided after the elections. I’m seeing more and more of my colleagues in tech that are searching for jobs and I don’t think the generative AI boom will generate enough employment opportunities to make up for losses in the rest of the tech industry. If government is divided, meaningful stimulus will not be in the cards unless we are facing economic catastrophe.